Wage compression occurs when there is little difference in pay between employees in the same position regardless of significant gaps in their respective experience, knowledge, and performance. This can, undoubtedly, increase unnecessary turnover and “quiet quitting” due to tenured employees perceiving this as a lack of being valued. Everyone loses. Various factors, such as a lack of differentiation in job roles, limited salary increases, or the failure to adjust compensation to reflect changes in the job market can cause wage compression.

During the pandemic, most organizations found it necessary to adjust entry-level pay to attract qualified candidates. Many companies also discovered a need to adjust the pay of current employees in entry-level positions to avoid more significant wage compression challenges, like employee turnover or lack of pay equity, employee engagement, or effective performance differentiators. Additionally, when states increase their minimum wage, it will likely lead to wage compression issues. These circumstances leave employees with significant experience in the same role as their peers with less experience paid nearly the same. Determining if your organization is experiencing wage compression requires thoroughly analyzing your employees’ compensation levels and corporate pay structure.

 

Here are some checklist items to help identify if wage compression exists in your company:

 

Review Compensation Data

Gather comprehensive data on the salaries of all employees across different job levels or grades within your organization. It is essential that multiple survey data sources, from both the market at large and from within the industry, be used to benchmark your salaries.

Analyze Salary Differences

Compare employees’ salaries and pay ratios within each position based on time in position, performance levels, gender, and minority status. Identify significant overlaps or minimal differences in compensation. If there is a substantial difference between employees with similar experience in the position, wage compression exists.

Compare Internal and External Salaries

Compare the salaries of employees who have been with the organization for a long time (internal hires) to those of new hires (external hires) for similar roles. If there is a substantial difference, wage compression exists.

Analyze Turnover Rates

High turnover rates, especially among experienced employees, could indicate wage compression. Employees may leave in search of better-paying opportunities elsewhere.

By conducting a comprehensive analysis using the steps mentioned above, you can gain insights into the presence and extent of wage compression within your organization. Wage compression conveys that employees are not valued, leading to low employee morale, engagement, and retention. Not only does it lead to higher than necessary turnover, but it can also lead to disparate pay allegations if employees are part of a protected class. If you need help with this analysis, consider seeking assistance from BalancedComp.

 

If you or your organization are suffering from wage compression, here are some recommended solutions BalancedComp offers to help resolve this:

 

1. BalancedComp: Salary Administration Management

Compa-Ratio Report & Budget Building

Our flagship web application includes a super convenient report that summarizes which employee(s) may be impacted by wage compression and fall “at-risk”. Even further, our Budget Builder tool included then allows you to use weighted scoring to factor in commensurate criteria based on your preferred worker scenarios to tell you the total cost. For example, those in their role for over 5 years compared to a more recent hire.

Job Evaluation and Grading: Implement a comprehensive job evaluation process to assess the relative value of different positions within the organization. Jobs can be graded based on factors such as required skills, responsibilities, and impact on the organization.

Market Research: Conduct regular market research to determine the prevailing salary ranges for different job roles in the financial industry. This will help ensure that the organization’s compensation is competitive and aligned with industry standards.

Transparent Communication: Ensure a reasonable level of transparency in the compensation process to build trust among employees. Clearly communicate the factors that influence pay decisions, such as market data, performance evaluations, and skill levels.

Regular Reviews and Adjustments: Conduct periodic reviews of the compensation structure and adjust as necessary to address any emerging wage compression issues.

 

2. BalancedResults: Performance Review Management

Merit-based Pay Increases

Implement a merit-based pay system that rewards employees based on their performance, skills, and contributions to the organization. This will help differentiate compensation based on individual performance and reduce wage compression.

Skill and Experience-Based Pay

Consider adjusting pay based on employees’ performance and experience levels. This approach recognizes the value of employees’ expertise and encourages career progression within the organization.

Budgeting & Performance Reviews

BalancedResults shares data bilaterally with BalancedComp, making both systems fully compatible and streamlining corporate review processes.

Say What You Mean, Mean What You Say

Many line managers report feeling uncomfortable in providing feedback during performance reviews. This application includes a Text Suggestion Library to empower supervisors to use accurate, effective, and industry-specific language to streamline communications with direct reports. This also strengthens professional candor, minimizes opportunity for miscommunications, and builds trust.

 

3. BalancedRewards: Corporate Incentive Planning

Variable Compensation

Introduce performance-based bonuses or annual incentives to reward high performers and motivate others to improve their performance, further differentiating compensation.

Expertise vs. Entitlement

We work directly with you to help build an effective, self-funding incentive program that aligns with your compensation philosophy and appeals to true worker motivations.

Data Forecasts & Reporting

Evaluate whether your program pays for itself before activation with instant reporting features, creating crucial visibility between employees and company stakeholders, and providing a direct line of sight between payout and their goals.

 

Maintaining a more proactive approach is advised. Instead of waiting for an employee to complain about wage compression or sulk off and find another employer, correcting it is the least expensive route for both the company and the employee. It may not eliminate all turnover, but as Socrates said,”It is better to suffer injustice than to commit it.”

Back to Blog